Dimmer view

As President Donald Trump bellows ever louder, analysts are taking a dimmer view of the Canadian dollar.

How you view that, of course, depends on whether you’re exporting or importing to or from the U.S., or planning a summer trip south and praying for a stronger loonie.

There are many things that play into the fate of the currency, but it’s U.S. trade policy that has analysts downbeat of late.

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“We have revised our CAD forecasts weaker in light of a more hostile trade policy environment, which may last through U.S. mid-terms, and some supply-bottleneck renewed downside risk in crude prices,” Daniel Hui and Niall O’Connor of JPMorgan Chase said in their latest report, referring to the loonie by its symbol.

Mr. Hui and Mr. O’Connor now expect to see the Canadian dollar at just below 77 US cents by the end of September, around where it has traded recently, down from their earlier expectation of 80 US cents by that point.

Further out, they project 78.7 US cents at the end of this year, just below 79.5 by next March, and then back to the 80 mark by mid-2019.

“NAFTA dramatically turned from a near-term positive catalyst to fatter downside tail risk,” Mr. Hui and Mr. O’Connor said, noting the threat to the North American free-trade agreement amid suggestions of the U.S. instead holding separate talks with each of Canada and Mexico.

Critical, too, of course, are the Trump administration’s recent tariffs on Canadian steel and aluminum, and Ottawa’s retaliation, set to come into effect next month.

Based on Justin’s false statements at his news conference, and the fact that Canada is charging massive Tariffs to our U.S. farmers, workers and companies, I have instructed our U.S. Reps not to endorse the Communique as we look at Tariffs on automobiles flooding the U.S. Market!

PM Justin Trudeau of Canada acted so meek and mild during our @G7 meetings only to give a news conference after I left saying that, “US Tariffs were kind of insulting” and he “will not be pushed around.” Very dishonest & weak. Our Tariffs are in response to his of 270% on dairy!

This took on added urgency at the weekend summit of G7 leaders in Quebec, where Mr. Trump again threatened to hit Canadian and European autos with import tariffs and told his representatives not to endorse the group’s final statement.

As The Globe and Mail’s Robert Fife reports, he also took shots at Prime Minister Justin Trudeau, who said Canada wouldn’t be pushed around and, with plans already in motion, will fire back at American trade actions.

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“We expected a frosty outcome, but that was way darker than anticipated,” said Bipan Rai, North American head of foreign exchange strategy at CIBC World Markets.

“Trump’s constant about-face, brinkmanship approach to negotiations implies heavy two-way risk for [foreign exchange], and that the trade premium is likely here to stay for CAD assets,” he added.

“Crucially – Trump tweeted that the U.S. is looking at tariffs on auto imports (the White House was already reported to be looking Section 232 of U.S. trade law a few weeks back). Escalation of tensions in the auto sector is a huge risk given its important to both the U.S. and Canadian economies. Sizeable tariffs here will dent growth prospects to a material degree.”

German Chancellor Angela Merkel speaks to U.S. President Donald Trump during the second day of the G7 meeting

Note, however, that JPMorgan’s new forecasts assume that NAFTA actually survives at the end of the day, though that day won’t come until next year, and that “trade tension will remain elevated into U.S. mid-term elections in November.”

Mark McCormick, North American head of foreign exchange strategy at TD Securities, said his group spent a lot of last week talking to clients about Canada.

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“The consensus is that the geopolitical backdrop is a sea of minefields for Canada, as Trump is stressing the system with little regard for the spillover effects into small, open economies,” Mr. McCormick said.

“Many, like us, see NAFTA as an asymmetric negative for the loonie insofar as the clock has seemingly run out to get a deal through the U.S. (and Mexico) this year,” he added, noting that the views he’s hearing suggest “Canadians are silent bulls or agree with the downbeat view in CAD.”

Should NAFTA collapse, observers expect the loonie to take a further hit.

Analysts see the currency’s weakness as a good thing for Canada’s exporters, who, outside of the oil patch, aren’t gaining any ground.

“U.S. tax cuts and regulatory rollbacks have weakened our competitive position, while tariffs risk further blunting the effects of any pickup in U.S. demand this year,” said Royce Mendes of CIBC World Markets.

“For now, the best defence will be a weak Canadian dollar,” he added.

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“In one broad stroke it can keep the economy competitive on the global stage. As a result, even looking past the recent rise in trade tensions with the U.S., the loonie is likely to remain around the [almost 77-cent] level for some time.”

Also playing into the loonie’s fortunes are the diverging policies of the U.S. and Canadian central banks.

While the Bank of Canada has been sitting tight, the Federal Reserve has been raising interest rates, and is expected to do so again this week.

That makes the Canadian dollar less attractive, though economists expect the Bank of Canada could resume its rate-hiking cycle in July.

“Our baseline view is that the data will be sufficiently strong to justify a July rate hike,” said technical strategist George Davis of RBC Dominion Securities.

“This should serve as an offset to some of the trade-related uncertainty.”

Markets at a glance

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Fed and fed up: Week ahead

This week is all about the Fed, being fed up, and being overfed.

First up, on Wednesday, is the Federal Reserve, which economists expect will raise its benchmark interest rate again by one-quarter of a percentage point. The following two days bring reports on Canadian home sales and household debt and wealth.

FED

Markets expect the U.S. central bank’s Federal Open Market Committee, the policy-setting group, to raise the federal funds rate’s target range to 1.75 to 2 per cent.

“A rate rise this week isn’t really in doubt, however the narrative for the remainder of this year is what markets are more likely to be more fixated on,” said CMC Markets chief analyst Michael Hewson.

“How does the Fed see the U.S. economy, and what concerns do they have about recent trade tensions, and the impact on investment decisions, as well as expectations around the run rate for inflation, alongside their tolerance levels for a minor overshoot?”

A rate hike would also mark something of a milestone in the recovery from the financial crisis, with the target range eclipsing a measure of inflation that strips out volatile items such as energy and food prices, noted Bank of Montreal deputy chief economist Michael Gregory.

A quarter-point jump would put the midpoint of the target range at 1.875 per cent, he said.

That would top what’s known as core personal consumption expenditures inflation, which now stands at an annual rate of 1.8 per cent, though it would remain below the pace of all prices.

“Although real policy rates will still be slightly negative relative to headline PCE inflation (2 per cent), this is an important milestone on the road to policy normalization (a trip that began 2 1/5 years or 175 basis points ago),” Mr. Gregory said.

With an interest rate increase expected, markets will focus on the Fed’s updated economic forecasts and the so-called “dot plot,” which spells out the rate-hike timeline expected among individual policy makers.

“With second quarter GDP growth tracking at between 3.5 and 4 per cent, annualized, and signs that underlying price pressures are picking up, the accompanying statement and economic projections may well hint that a further two rate hikes are coming in the second half of this year,” said Michael Pearce, senior U.S. economist at Capital Economics.

OVERFED

Statistics Canada may buoy the hearts of policy makers who have been trying to curb the voracious credit appetite of consumers, and apparently succeeding.

On Thursday, the agency releases a first-quarter report expected to show the pace of debt growth slowed as, among other things, new mortgage-qualification rules came into effect.

Household credit growth

Residential mortgage credit and home equity lines of credit

percent change, right scale)

Consumer credit, excluding home equity lines of credit

(percent change, right scale)

Level of the debt-to-disposable-income ratio (left scale)

175%

10%

November FSR

8

170

6

165

4

160

2

155

0

2014

2015

2016

2017

2018

THE GLOBE AND MAIL, SOURCE: BANK OF CANADA

Household credit growth

Residential mortgage credit and home equity lines of credit

percent change, right scale)

Consumer credit, excluding home equity lines of credit

(percent change, right scale)

Level of the debt-to-disposable-income ratio (left scale)

175%

10%

November FSR

8

170

6

165

4

160

2

155

0

2014

2015

2016

2017

2018

THE GLOBE AND MAIL, SOURCE: BANK OF CANADA

Household credit growth

Residential mortgage credit and home equity lines of credit percent change, right scale)

“While income growth wasn’t spectacular to start the year, it was far stronger than a year ago, which should dampen debt ratios,” said Benjamin Reitzes, BMO’s Canadian rates and macro strategist, referring to the widely watched measure of household debt to disposable income.

“Note that the ratio generally falls in Q1 (averaging 0.7 of a percentage point since 2010) as housing is usually softer through the winter, but look for a steeper drop this year,” he added, citing the fact that the report also details wealth levels.

“Net worth as a share of disposable income climbed in Q4, but a drop in the TSX and home prices suggests we’ll see a decline in net worth in Q1. Over all, Canadian balance sheets are in decent shape, despite the persistent concerns about the debt burden.”

FED UP

Expect to see an ongoing slump in housing markets when the Canadian Real Estate Association closes out the week Friday with its report on May sales and prices.

This, too, will buoy the hearts of policy makers in British Columbia and at the Office of the Superintendent of Financial Institutions, the bank regulator, whose measures have eased the inflated Vancouver and Toronto markets.

The Ontario government, whose fair housing plan also played a big role, is about to be replaced by a Conservative administration led by Doug Ford, who mused during the election campaign about possibly killing the tax on foreign buyers of Toronto area real estate.

Year-over-year growth in quality-adjusted

benchmark house prices

Greater Vancouver Area, Vancouver Island,

Victoria and Fraser Valley

Greater Toronto Area, Barrie and district, Guelph and district

Calgary, Edmonton, Saskatoon and Regina

Ottawa, Montreal and Moncton

Canada

35%

November FSR

30

25

20

15

10

5

0

-5

-10

2015

2016

2017

2018

THE GLOBE AND MAIL, SOURCE: BANK OF CANADA

Year-over-year growth in quality-adjusted

benchmark house prices

Greater Vancouver Area, Vancouver Island, Victoria and Fraser Valley

Greater Toronto Area, Barrie and district, Guelph and district

Calgary, Edmonton, Saskatoon and Regina

Ottawa, Montreal and Moncton

Canada

35%

November FSR

30

25

20

15

10

5

0

-5

-10

2015

2016

2017

2018

THE GLOBE AND MAIL, SOURCE: BANK OF CANADA

Year-over-year growth in quality-adjusted benchmark house prices

Greater Vancouver Area, Vancouver Island, Victoria and Fraser Valley

Greater Toronto Area, Barrie and district, Guelph and district

Calgary, Edmonton, Saskatoon and Regina

Ottawa, Montreal and Moncton

Canada

35%

November FSR

30

25

20

15

10

5

0

-5

-10

2015

2016

2017

2018

THE GLOBE AND MAIL, SOURCE: BANK OF CANADA

Having already seen several local real estate board reports, including those from Vancouver and Toronto, BMO’s Mr. Reitzes expects CREA’s national number to show home sales tumbled 17 per cent in May from a year earlier, with average prices down 5 per cent.

The MLS home price index, which observers believe is a better measure, is expected to show a gain of just 1 per cent, the slowest pace since late 2009.

On a monthly basis, expect to see a “flat to lower” showing in sales in May from April.

“There are some early signs that the market is stabilizing but we’re still waiting on a rebound,” Mr. Reitzes said.

“Toronto and Vancouver remain soft (outside a still-robust condo market), along with Calgary, while activity has plateaued in the hot markets of Montreal and Ottawa,” Mr. Reitzes said.

The fed up part of this refers to homeowners who won’t sell as prices ease.

At last count, in April, new listings were down 4.8 per cent from March, falling to a nine-year low for that month and sitting 10 per cent below their 10-year monthly moving average.

MONDAY: FED WELL

The International Economic Forum of the Americas - Conference of Montreal kicks off, drawing speakers from across the globe to discuss issues from geopolitical threats to artificial intelligence.

Montreal Mayor Valérie Plante gets it started. Later in the day, Quebec Premier Philippe Couillard and others highlight what will no doubt be a grand opening luncheon.

TUESDAY: FEEDING FRENZY

The U.S. reports its key inflation numbers, which sets the stage for Wednesday’s Fed decision. Economists believe consumer prices rose 0.2 or 0.3 per cent in May from April, with annual inflation at 2.8 per cent.

That, of course, will be overshadowed by the meeting in Singapore between North Korea’s Kim Jong-un and President Donald Trump, fresh from having ruffled feathers at the G7 summit. Expect a feeding frenzy at this historic get-together.

“The meeting is a big deal politically, but even if a major breakthrough is announced, the impact on South Korea’s financial markets and economy is likely to be fairly modest,” said Gareth Leather of Capital Economics.

Read more

WEDNESDAY: FAST FOOD

Besides the afternoon Fed announcement, the new projections and a news conference with central bank chair Jerome Powell, Britain reports May inflation numbers.

“At the most recent inflation report, the Bank of England downgraded its inflation target for this year to 2.5 per cent, which in light of recent sharp rises in oil prices seems remarkably optimistic on its part,” said CMC’s Mr. Hewson.

“For the most part, inflation has fallen back from peaks of 3.1 per cent at the beginning of the year to 2.4 per cent now, however there is no evidence that any of this reflects the recent surge in oil prices, which saw a sharp jump in EU [inflation] to one-year peaks in its most recent numbers,” he added.

“If this is translated into the U.K. numbers, we could see inflation tick higher.”

Also, quarterly results from Roots Corp.

THURSDAY; FOOD FOR THOUGHT

A biggie for central bank watchers, with the European Central Bank at centre stage.

And, noted BMO senior economist Jennifer Lee, the ECB is “finally getting what it has always wanted” in terms of faster inflation. She cited the latest consumer price report that showed annual inflation in the euro zone at 1.9 per cent in May, the highest pace in a year and almost bang on the 2-per-cent goal.

“And, with the heat from Italy dialled down a notch, the ECB will now be able to freely discuss (and admit to it) the prospects of scaling back its bond-buying program this year,” she added.

“Don’t expect any details, just discussion.”

Markets will also be watching for the May report on U.S. retail sales, expected among economists to show an increase of 0.4 per cent.

FRIDAY: COMFORT FOOD

Besides home sales, Canada’s manufacturers also get to see how they fared in April.

“We expect manufacturing sales were little changed in April — not increasing but also not giving back any of the cumulative 4.1-per-cent jump over the prior two months,” Royal Bank of Canada economists said in a lookahead, expecting to see prices up and volumes down by about 0.2 per cent.

The Bank of Japan also releases its decision, but no change is expected.

In case you missed it

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